Last week, the market made up for its holiday-shortened schedule with an impressive display of several bearish mirages, one-by-one, fading into the next bullish oasis that further fueled the bulls’ confidence.

The Two July Highs

Last week also established a bullish pattern at the start of what is typically one of the most bullish months of the year. July is also a pivotal month for determining market reversals that often frighten investors in the late summer and early fall. This tendency for July to identify the high is particularly pronounced after significant rallies, such as the one we’re experiencing.

The first July high isn’t a price point; it’s investor enthusiasm. There were several demonstrations of this last week, but the market’s strongest such message came on Friday when the nonfarm payrolls reported numbers that were “status quo.”

There is a growing feeling that the labor market is weakening. This feeling is shared by Fed Chair Powell, and therefore, viewed as a potential lever that could push the Fed to lower rates.

Leading up to the report, vocal investors seemed increasingly certain that they saw Thursday about to provide hard data indicating a long-awaited acceleration of significant weakening in the labor market.

In fact, consensus estimates for growth in payrolls ranged from 106k-110k, but the Street’s whisper number was believed to be as low as 95k.

As a result, the reported number of 147k jobs added was substantially higher than the mirage of weakness that preceded the report. Furthermore, the unemployment rate, which was previously 4.2% and expected to rise to 4.3%, instead fell to 4.1%.

Finally, the other component of the bears’ mirage of trouble in the current labor market is wage inflation.  That mirage also evaporated when the expectations for average hourly earnings to rise from 0.3% to 0.4% reported a decline to 0.2%.

While the media will pick apart the reams of data in the report to find all kinds of reasons the “market got it wrong,” the big picture is that the key metrics continued the “status quo” slowly weakening trends in the labor market, but investors were expecting worse, and that’s bullish.

Furthermore, there is a loud desire for the Fed to cut rates, but Thursday’s market action demonstrated that it is certainly not a requirement for this market to move higher. In fact, fed funds markets' expectations for a rate cut in July dropped from about 23% to about 4%, and the odds of a cut in September’s meeting fell from about 90% to 73%.

Considering the seasonally strong performance of July shown below, and several other bearish mirages that are in the process of following the same bullish path as Thursday’s labor report, the summer is likely to heat up.

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